Paying additional principal reduces the amount of time (and interest) needed to pay off a home.
You reduce your risk of being stuck with an "upside-down" mortgage.
Paying additional principal on a mortgage can leave you strapped for cash, which can be a problem if you lose your job or become disabled.
You may lose out on investment gains by sinking all your additional capital into mortgage repayment.
When paying off the mortgage on your house, the popular idea is that you should try to pay off your mortgage as soon as possible. However, is this always the best idea? What if you are simultaneously trying to attend school, or taking care of a young child? What if you are concerned about your future employment?
There are many examples where paying additional principal on a mortgage may not be the best idea. Here are some of these examples:
You realize that your job is in jeopardy and you have little to no money in savings. You should probably start saving the extra money you have in a savings account, rather than using it to pay extra on your mortgage. After all, that mortgage requires payment every single month, regardless of how much extra money you've already placed into it.
You find a stock investment opportunity that pays you a 15% yearly dividend. Meanwhile, your own mortgage interest rate is at 5.50%. In this case, you are better off investing the extra cash in the dividend-bearing stock.
You owe your credit card company money on past due statements. Credit card debt is bad for a number of reasons: first, it usually comes with a very high interest rate, and second, it lowers your credit rating. When deciding whether to pay off credit card versus mortgage debt, always go with credit card debt first.
On the other hand, sometimes paying off mortgage debt is better than saving the money or investing it elsewhere. Here are some examples:
You have a large sum of money stashed away in a low interest-bearing CD or savings account. While it's a good idea to have some money in savings, a CD or savings account with a 0.5 – 1.5% interest rate actually results in monetary loss over time. This is because the national inflation rate is usually 2% or greater. Mortgage interest rates typically start at 4% or higher.
You have taken an Adjustable Rate Mortgage (ARM) at super-low interest rates. However, such interest rates are, by their very name, subject to change. In such a case, you are better off paying the largest amount of principal possible.
You are planning to sell your house very soon and do not have a lot of principal invested. If your house has lost some of its previous value, you could end up owing money during the sale. If you don't want to end up with an "upside-down" mortgage, place some additional principal into it today.
You bought the property in order to fix it up and "flip" it for more money. In such a case, it makes no sense to pay extra principal on a mortgage. Your best bet is to spend the extra cash fixing up the property and then selling it as quickly as possible.
Depending on your other debts, as well as your situation in life, you may be better off either paying, or not paying, additional principal on your mortgage. When considering whether or not to pay additional principal, take into account what you would otherwise do with that extra money, how you plan to pay your mortgage in the event of a disability or unemployment, and also if holding onto a mortgage is advantageous in light of other, more lucrative, investments.